DYNAMIC ENVIRONMENTAL TAXES UNDER INTERNATIONAL DUOPOLY

This paper studies a dynamic game of environmental taxes between two countries in the absence of explicit trade policies when both governments and firms act strategically. We demonstrate that the environmental tax in the steady‐state equilibrium in a dynamic environmental tax game is lower than that in a static environmental one. Therefore, the dynamic behaviour of the governments results in an increase in the environmental damage. Further, as a result of international cooperation on environmental taxes between two countries in the beginning of policy competition, there is an increase in the optimal environmental tax. This implies that it is important to set cooperative environmental taxes in the beginning of policy competition because non‐cooperative environmental taxes in the dynamic game result in the race‐to‐the‐bottom, which does not lead to environmental improvement.     

The importance of government commitment in attracting firms: A dynamic analysis of tax competition in an agglomeration economy

Agglomeration tendencies of industrial firms significantly affect the nature of tax competition. This paper analyzes tax competition between two countries over an infinite time horizon in an economy with trade costs and internationally mobile industrial firms. Most of the previous studies on tax competition in the ‘new economic geography’ framework employ static models. In this study, two governments dynamically compete with each other to attract firms through their choices of taxes and subsidies. It is shown that the commitment of the governments to their policies is crucial in determining the distribution of firms in the long run. Specifically, if governments find each others׳ tax policies credible, then one country will attract all the firms when trade costs are low enough to make agglomeration forces dominant. If policies are not credible, both countries may attract an equal share of firms even when trade costs are low, as the lack of commitment by governments acts as a dispersion force.     

Strategic Environmental Policies when Waste Products are Tradable

The paper deals with international trade in hazardous waste products when there is an international oligopoly market for waste, and both waste‐importing and waste‐exporting countries act strategically to utilize national environmental policies to attach rents arising from trade in waste. The authors model a multiple‐stage game where waste is generated in an industrialized country as a byproduct of production, and potentially is exported to some less‐developed countries, if not abated locally, or imposed on local residents at a cost of an environmental tax. In the market for waste, an oligopolistic supply is assumed. The demand for waste is perfectly competitive, with waste‐processing firms guided by marginal disposal costs and environmental taxes levied by foreign countries. With each country playing Nash, the analysis finds domestic and foreign taxes to be distorted from the Pigouvian taxes in such a way that the domestic (waste‐exporter) tax rate is set below, and the foreign tax rate is set above, the Pigouvian taxes. However, a global welfare optimum requires tax distortions in the opposite direction, in the sense that foreign environmental taxes must be set below the Pigouvian tax rate.     

Plant location and strategic environmental policy with inter-sectoral linkages

In recent debates on trade liberalisation the concern has often been expressed that with more competitive international trade governments will be worried that by setting tougher environmental policies than their trading rivals they will put domestic producers at a competitive disadvantage, and in the extreme case this could lead to firms relocating production in other countries. The response by governments to such concerns will be to weaken environmental policies (‘eco-dumping’). In competitive markets such concerns are ill founded, but there is a small amount of literature which has analysed whether governments will indeed have incentives for eco-dumping in the more relevant case of markets where there are significant scale economies; even here there is no presumption that the outcome will involve eco-dumping.In this paper we extend the analysis of strategic environmental policy and plant location decisions by analysing the location decision of firms in different sectors which are linked through an input-output structure of intermediate production. The reason why we introduce inter-sectoral linkages between firms is that they introduce an additional factor, relative to those already analysed in the literature, in the plant location decision, which is the incentive for firms in different sectors to agglomerate in a single location. This has a number of important effects. First, there is now the possibility of multiple equilibria in location decisions of firms. Following from this there is the possibility of catastrophic effects where a small increase in an environmental tax can trigger the collapse of an industrial base in a country; however there is also the possibility that a country which raises its environmental tax could attract more firms to locate in that country, because of the way the tax affects incentives for agglomeration. Finally, and again related to the previous effects, there is the possibility of a hysteresis effect where raising an environmental tax in one country can cause firms to relocate to another country, but subsequently lowering that tax will not induce firms to relocate back into the original country.We consider a simple model with two countries, two industries, an upstream and a downstream sector, and two firms per industry. The analysis proceeds through a three-stage game: in the first stage the governments of the two countries set their environmental policies; in the second stage the firms in both industries choose how many plants to locate and where; in the third stage firms choose their output levels, with the demand for the upstream firms being determined endogenously by the production decisions of the downstream firms. We assume that there are no limits to production capacity, so that firms do not build more than one plant in any country. However, firms may build plants in different countries because of positive transport costs. Although the model appears very simple, it cannot be solved analytically, so all the conclusions must be drawn from numerical simulations.     

Multiproduct Firms and Environmental Policy Coordination

The literature that analyzes the coordination of environmental taxes by governments considers that firms produce a single good at a single plant. However, in practice firms tend to produce several goods at various production plants (multiproduct firms). These firms may organize themselves in a centralized or decentralized fashion for purposes of decision-making: This affects their output and pollution levels. This paper sets out to analyze the coordination of environmental taxes considering multiproduct firms. We find that the organizational structure chosen by the owners of the firms depends on whether or not governments coordinate with one another in setting taxes, and on whether the goods produced are substitutes or complements. Social welfare is greater if a supranational authority sets taxes in all countries. In this case, joint welfare is never lower if the authority is constrained to set the same tax in all countries.     

International Cross-Ownership and Strategic Trade Policies

The paper analyzes a model of strategic trade policies in the presence of international cross-ownership of firms that are heterogenous both in terms of costs and in terms of extent of foreign ownership. The equilibrium pattern of taxes and subsidies is characterized for any arbitrary cross-ownership profile, and any number of heterogenous firms. The equilibrium subsidy (or tax) given to any firm is shown to depend, in a separable manner, on the firm's characteristics and on the covariance of the distribution of cost and foreign ownership across firms. A neutrality theorem is proved concerning the Nash equilibrium of the game between governments: in equilibrium, the pattern of trade, the value of each firm, and world welfare are independent of the ownership pattern.     

Tax Competition in Vertically Differentiated Markets with Environmentally Conscious Consumers

This paper analyses the effects of tax competition on environmental product quality, pollution and welfare in a two-country, vertically differentiated, international duopoly, in which consumers are environmentally conscious. The firm in each country chooses first the environmental quality of its product (which reflects the emissions generated in the production process) and then the price. In equilibrium one country will be more polluted than the other because firms choose different levels of environmental quality of their products. We find that a country’s optimal commodity tax is higher if the domestic firm is the more polluting supplier. Furthermore, non-cooperative commodity tax rates are inefficiently high in equilibrium. This is because, in this framework with environmentally aware consumers, commodity taxes affect the choice of firms regarding their emissions. Therefore, a domestic tax reduction not only raises the profits of the foreign firm but also lowers its emission levels, resulting in higher welfare for the other country. We also analyse the optimal cooperative and non-cooperative commodity and emission taxes with border tax adjustments. With these two policy instruments available, commodity taxes are higher.     

Environmental Taxes and First-Mover Advantages

This paper studies whether governments prefer to be leaders or followers in environmental policies. To analyze this question I assume transboundary pollution and two countries that have to decide whether to set environmental taxes sequentially or simultaneously. When taxes are set sequentially an effect, denoted as the sequential setting effect, arises that raises the equilibrium taxes. I show that whether governments prefer to be leaders or followers in taxes depends on the degree to which environmental pollution spills over to trading partners. When this overspill is low enough, taxes are strategic complements and both the leader and the follower obtain greater welfare than under a simultaneous tax setting. However, the leader country obtains greater welfare than the follower. In this case, governments set taxes sequentially. When the degree to which environmental pollution spills over to trading partners is high enough, taxes are strategic substitutes and governments set taxes simultaneously. In this case, each government wants to avoid becoming the follower in taxes.     

Economic integration and tax policy with endogenous foreign firm ownership

This paper analyses the impact of economic integration on tax policy in a model where corporate taxation is motivated by the desire to tax profits accruing to foreigners and the number of foreign owned firms is endogenous. Increasing economic integration is modeled as a decline in trade costs or tariffs. It turns out that declining trade costs lead to increasing profit taxes if the government may use import tariffs. If tariffs are not available, declining trade costs induce profit taxes to decline as well. A mandatory reduction in tariffs also triggers profit tax reductions. We conclude that the existence of foreign firm ownership may fail to prevent profit taxes from declining as economic integration proceeds.     

Market Access and WTO Border Tax Adjustments for Environmental Excise Taxes under Imperfect Competition

The literature identifies linkages between domestic environmental policies and trade, the treatment of imports being an important issue in administration of domestic environmental excise taxes. With the aim of ensuring foreign exporters do not attain a competitive advantage, border tax adjustments are used. Since most environmental excise taxes apply to intermediate goods, the relevant border tax adjustment applies to final imported goods. However, when both intermediate and final goods markets are oligopolistic, border tax adjustments may be non‐neutral. Moreover, even if market access is unchanged, border tax adjustments can still lead to redistribution of profits between domestic and foreign firms.     

Voluntary Environmental Agreements vs. Emission Taxes in Strategic Trade Models

The purpose of the paper is to narrow the gap between the widespread use of voluntary agreements and research on the rationale of such approaches. A topical example are voluntary agreements of many industries to reduce carbon dioxide emissions because of global warming. If the industry anticipates that taxes and fees will be introduced in the coming years, it seems rational to act in advance in order to mitigate the tax levels.The conventional approach in strategic trade and tax models was to look at a two-stage game where governments set taxes first and then firms react. In such a policy regime the government is concerned about the international competitiveness of its firms and sets taxes below marginal damages. In this paper, we consider a policy regime with a reversed timing. Firms commit themselves in the face of emission taxes to abatement efforts and to lower levels of the environmentally intensive output. Then the government introduces the tax. Under this timing of strategies the tax is equal to marginal damage. Firms waive profit and reduce output in order to use less of the polluting input. The reward for this behavior will be a less strict use of policy instruments and hence lower abatement costs in the near future.     

Asymmetric Tax Policy Responses in Large Economies With Cross-Border Pollution

We build a model of cross-border pollution between two large open economies, one importing the polluting good and the other exporting it, and derive their non-cooperative trade and environmental tax policies. We show among other things, that (1) in response to a bilateral reduction in trade taxes by both countries, the former country’s optimal policy is to lower its Nash emissions tax while the latter’s is to raise it, and (2) in response to an increase in emissions tax rates by both countries, the former country’s optimal reaction is to raise its Nash import tariff, while the latter’s is to reduce its Nash export tax. That is, in the present context, freer trade leads the exporting country to adopt stricter while the importing country laxer environmental tax policies.     

Taxing the Financially Integrated Multinational Firm

This paper develops a theoretical model of corporate taxation in the presence of financially integrated multinational firms. Under the assumption that multinational firms use some measure of internal loans to finance foreign investment, we find that the optimal corporate tax rate is positive from the perspective of a small, open economy. This finding contrasts the standard result that the optimal‐source‐based capital tax is zero. Intuitively, when multinational firms finance investment in one country with loans from affiliates in another country, the burden of the corporate taxes levied in the latter country partly falls on investment and thus workers in the former country. This tax exporting mechanism introduces a scope for corporate taxes, which is not present in standard models of international taxation. Accounting for the internal capital markets of multinational firms thus helps resolve the tension between standard theory predicting zero capital taxes and the casual observation that countries tend to employ corporate taxes at fairly high rates.     

Fiscal Reliance on Tariff Revenues: In Search of a Political Economy Explanation?

One "stylized fact" about trade policy is that trade taxes as a proportion of total tax revenue are inversely related to a country's economic development, as in countries with poor administrative capabilities trade taxes represent the easiest way for governments to raise revenue (Administrative Capabilities Hypothesis). In this paper we develop an alternative explanation based on political economy considerations: using data from 64 developing countries from 1982 until 1997 we find that the Administrative Capabilities Hypothesis must be complemented with a political economy explanation in order to be able to provide a better account of the relevant empirical evidence.     

International Commodity Taxation under Monopolistic Competition

We analyze non‐cooperative commodity taxation in a two‐country trade model characterized by monopolistic competition and international firm and capital mobility. In this setting, taxes in one country affect foreign welfare through the relocation of mobile firms and through changes in the rents accruing to capital owners. With consumption‐based taxation, these fiscal externalities exactly offset each other and the non‐cooperative tax equilibrium is Pareto efficient. With production‐based taxation, however, there are additional externalities on the foreign tax base and the foreign price level that lead non‐cooperative tax rates to exceed their Pareto efficient levels.     

Market Integration and Competition in Environmental and Trade Policies

Recent empirics suggest the relevance of transport cost reductions for world trade growth along with eliminations in protectionist trade barriers. To address the welfare effects of trade cost reductions in a context of ??trade and the environment,?? we develop a two-stage game model where governments choose environmental and trade policies and firms play a Cournot-Nash game. We show that reductions in transport costs lead to lower emission taxes and higher tariffs. And, we find that the degree of pollution damage plays a central role in whether market integration is welfare-improving relative to autarky.     

Brain-drain taxes for non-benevolent governments

This paper investigates the welfare effects of brain-drain taxes levied by non-benevolent governments, whereby a country collects a tax from skilled emigrants but potentially wastes a sizable portion of the revenue. Using a model in which taxes are chosen to maximize expected political rents, I show that the availability of a brain-drain tax increases a weighted sum of citizen utilities. However, the government's optimal brain-drain tax is found to be higher than the level that maximizes this weighted sum. In another model, a brain-drain tax is found to be desirable when governments use public good expenditures to compete for mobile residents.     

The effect of the tax reform act of 1986 on the location of assets in financial services firms

This paper examines the effects of the Tax Reform Act of 1986 on the international location decisions of U.S. financial services firms. The Act included rule changes that made it substantially more difficult for U.S. firms to defer U.S. taxes on overseas financial services income held in low-tax jurisdictions. We use information from the tax returns of U.S. corporations to examine how local taxes affect the allocation of financial assets held abroad by financial services firms. We find that, before the Act, the location of reported assets in financial subsidiaries was responsive to differences in host country tax rates across jurisdictions. However, after the Act, differences in host country tax rates no longer explain the distribution of assets held in financial services subsidiaries abroad. Our results suggest that the tightening of the anti-deferral provisions applicable to financial services companies has been successful in diminishing the effect of host country income taxes on asset location decisions.     

FISCAL CONSTRAINTS, COLLECTION COSTS, AND TRADE POLICIES

The last two decades witnessed trade liberalization in many developing countries. What caused this trend, and why have trade barriers been so ubiquitous when economic theory overwhelmingly supports free trade? This paper proposes that governments' revenue needs are the driving force. Governments may rely disproportionately on trade taxes because they are inexpensive to collect. Trade liberalization is an integral part of a tax reform: a tax base expansion is necessary to allow governments to reduce tariff rates. This hypothesis is supported by a panel data analysis of 27 developing countries.     

Foreign Direct Investment and Environmental Taxes

Abstract. This paper studies the effect of foreign direct investment (FDI) on environmental policy stringency in a two-country model with trade costs, where FDI could be unilateral and bilateral and both governments address local pollution through environmental taxes. We show that FDI does not give rise to ecological dumping because the host country has an incentive to shift rents away from the source country toward the host country. Environmental policy strategies and welfare effects are studied under the assumption that parameter values support FDI to be profitable.